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Margin hit by pricing pressure

• Deepak Nitrite (DN) reported a muted operating performance in 1QFY26, as EBITDA declined by 39% YoY to INR1.9b. Gross margin contracted by 280bp YoY to 28% and EBITDA margins contracted by 420bp, led by the persistent pricing pressure and a slower-than-expected recovery in some agrochemical intermediates.
• Amid a volatile geopolitical environment and shifting global trade dynamics, DN reported volume growth across its diverse product portfolio, driven by a strong recovery in demand from non-agrochemical applications.
• Considering a muted performance and macroeconomic headwinds, we cut our EPS estimates by 9% for FY26 and largely maintain our FY27 estimates. We value the stock at 25x FY27E EPS to arrive at a TP of INR1,630. Reiterate Sell.

Phenolics and Intermediates segments face margin headwinds

• 1Q revenue rose 3% YoY to INR19b (our est. INR19.3b), which included government incentive income of INR170m.
• EBITDA declined 39% YoY to INR1.9b (our est. INR2b). EBITDA, adjusted for government incentive, was INR1.7b.
• Gross margin came in at 28% (down 280bp YoY), while EBITDAM stood at 10% (down 420bp YoY).
• Reported PAT declined 45% YoY to INR1.1b (in line with est.), down 20% YoY.
• Advanced Intermediates revenue stood at INR6b (down 15% YoY), EBIT declined 47% YoY to INR355m, and EBIT margin came in at ~5.9% (down 340bp YoY).
• Phenolics revenue stood at INR13b (down 11% YoY), EBIT declined 43% YoY to INR1.2b, and EBIT margin came in at ~9% (down 340bp YoY).

Highlights from the management commentary

• Guidance and outlook: For the MIBK product (Methyl Isobutyl ketone), management expects merchant revenue of ~INR5.5b. Planned capex for FY26 stands at INR8b-10b. Peak debt is projected at INR70b-75b. For the polycarbonate project, management anticipates a payback period of 5-5.5 years with IRR of 16-18%.
• Macro environment: DN navigated a challenging global environment, marked by a slower-than-expected recovery in agrochemicals, pricing pressure from Chinese oversupply, and heightened geopolitical uncertainties. Management expects potential US tariff impacts to be moderate, given the limited consolidated exposure of 2.5-3%, and underscored India’s distinct advantage of balanced supply and demand-led growth.
• Pricing: In the Advanced Intermediates segment, DN faced pricing pressures, while the phenolics segment benefited from better realizations, supported by bottlenecking and capacity augmentation initiatives. MIBK prices remained highly volatile, particularly over the past six months. In 1Q, phenolics spreads improved QoQ, although segment revenue declined 6%.

Valuation and view

• Despite capacity expansion, new projects, process optimization, and a focus on innovation and sustainability, we expect DN’s performance to be weighed down by industry-wide challenges.
• A slower-than-expected recovery in some agrochemical intermediates, persistent oversupply from China, and rapidly evolving geopolitical developments continue to exert pricing pressure and add to pressure on operational performance.
• DN aims to become the largest player in the solvents market by focusing on import substitution. It is foraying into PC (165ktpa), Methyl Isobutyl Ketone (MIBK, 40ktpa), Methyl Isobutyl Carbinol (MIBC, 8ktpa), and Sodium Nitrite/ Nitrate, among other products. These products are taking shape and are likely to be commissioned in FY26. Some other previously announced capex projects have already been commissioned (fluorination plant, specialty salts unit).
• We cut our EPS estimates by 9% for FY26 and largely maintain our FY27 estimates. The stock trades at ~28x FY27E EPS of INR65.2 and ~19.5x FY27E EV/EBITDA. We expect a CAGR of 6%/14%/13% in revenue/EBITDA/adj. PAT over FY25-27 and value the stock at 25x FY27E EPS to arrive at a TP of INR1,630. Reiterate Sell.

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